What Is the 65-Day Rule for Trust Distributions?
Learn about a tax election that gives trustees flexibility to manage a trust's tax liability by shifting the timing of distributions after the year has closed.
The 65-day rule is a tax provision for fiduciaries of estates and certain trusts. It allows them to treat distributions made to beneficiaries within the first 65 days of a new year as if they were paid during the preceding tax year. This allows a trustee to manage the income tax liabilities of both the trust and its beneficiaries after the financial results of the year are known.
Understanding Core Concepts for the 65-Day Rule
A foundational concept in trust taxation is Distributable Net Income (DNI). DNI essentially establishes the maximum amount of taxable income a trust or estate can pass through to its beneficiaries in a given year. When a trust makes a distribution, it is said to “carry out” DNI to the beneficiary. This action results in a distribution deduction for the trust, lowering its own taxable income, while the beneficiary receives the income and becomes responsible for the associated tax.
The ability to use the 65-day rule hinges on the type of trust. A simple trust is required to distribute all of its income annually. In contrast, a complex trust has more flexibility; it may accumulate income or distribute principal. The 65-day rule election is exclusively available to complex trusts and estates, as only these entities have the discretion to time distributions for tax management.
The tax brackets for trusts and estates are highly compressed. For example, the top federal income tax rate of 37% applies to income above $15,200 for a trust in 2024, a threshold significantly lower than for individual taxpayers. The 65-day rule gives a trustee the chance to shift income from the highly taxed trust to a beneficiary who is likely in a much lower tax bracket.
Eligibility and Distribution Requirements
To utilize the 65-day rule, the entity making the distribution must be a complex trust or a decedent’s estate. Simple trusts, which are mandated to distribute all income currently, do not qualify for this election because they lack the discretionary authority over distributions that the rule is designed to accommodate.
Another requirement relates to the timing of the payment. The distribution of cash or property to the beneficiary must occur within the first 65 days following the close of the tax year. For most trusts on a calendar-year basis, this deadline is March 6, or March 5 in a leap year.
This 65-day window is a firm cutoff. A distribution made on the 66th day, for instance, cannot be treated as a prior-year distribution under this rule, regardless of the trustee’s intent.
How to Make the 65-Day Rule Election
The trustee or executor makes the election annually on Form 1041, the U.S. Income Tax Return for Estates and Trusts. The fiduciary must check the designated box for this election in Schedule G, “Other Information.” The election is made under Internal Revenue Code Section 663.
This election must be made on a timely filed tax return, including any extensions. Once the election is made for a particular tax year by checking the box and filing the return, it is irrevocable for that year. The election can apply to the entire amount of distributions made within the 65-day window or only a portion of them.
When the election is properly made, the trust or estate includes the amount of the distribution in its deduction for total distributions on its prior-year Form 1041. This reduces the entity’s taxable income for that preceding year. Consequently, the beneficiary who received the funds must report that same amount as income on their personal tax return for the same prior year. The trust communicates this information to the beneficiary by issuing a Schedule K-1.